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At a meeting of the Foueral Reserve Board with The Advisory Council, held in the Assenbly Hall, Letropolit4n 4,ationa1 Bank Building, at 11:15 A. on Tueeeay, September 18, 1917.. Present: Governor Harding, presiding, Yr. Warburg, Lr. Williams, Lr. Delunc, hr. Hamlin, Mr. Allen, Assistant Oecretary, all the members of the Advisory Council, and Secretary Grim. President Fergan read to the meeting recommendations of the Coun:-il as fellows: RECOVLENDATIONS OF THE COUNCIL TO THE FEDERAL READVISORY FEDERAL SERVE BOARD. September l, 1917. TCPIC NO. 1. The effect of the pending bond issue upon our general financial situation, the policy that the Federal reserve banks should pursue as to reserves against deposits and note issues, discount rates. Recommendation: The temporary effect of the pending Government bone issue upon the general financial The situation will be to einlocato Imrak dopct;its. effort to be made to place the bonus with small investora will also to a considerable extent encroach on savings uepouits. As this loan will cone on the market at the season when, in connecticn with the movement of crops, the greatest extenoien of bank credit usually takes place, the banks, especially at the centers, will need the assistance of the Federal reserve banks in the shape of short loans or redisccunts to a greater extent than they uid in connection with the former issue. As the money received by the government for the bonds is redisbursed and returns to the banks through the channels of Commerce the financial situation will gradually adjust itself to the net7 conditions created by the flotation of such a large issue of bonds. Bank credits will likely be still further expanded, resulting in increased deposits and loans. In anticipation of these conditions the Federal Reserve Bunks should pursue a policy of conservation of their reserves against deposits and note issues. For this prupose, while they should meet liberally the temporary requirements of member banks for the prupose of putting throug1, the governhient bond issue, any undue expansion thereafter of a more or less permanent nature should be curbed and controlled by the Federal Reserve Banks' discount rites; for the protection of their reserves the Federal Reserve Banks should raise their liscount rates whenever ocrAsion calls for such action. Those banks should be kept in a strong position not only in the interests of further government financing but to prevent any undue expansio,t of credit by their member banks through the discount facilities afforded them. TOPIC NO. 2 General discussion of the Foreign Exchange situation: To what extent can this country continue to give credits to the naticns with which it is associated in the war which normally send us gold in settlement of trade balances due us, and continue to ship gold to those nuetral nations to which we may be indebted. What restrictions, if any, are necessary upon our imports to offset the embargoes on exports Recommendation: The Council has nothing on which to base a definite opinion as to what extent cos. 4 this country can continue shipments of rold to to neutral countries while itself advancing money to meet the requirements of-the countries associated with us in the war. It seems to us the shipments of gold are a pirt of the contribution which we are making to these countries, being,part of our advances to them, for the prosecution of the war. To what extent this can be continued without unduly impairing our resources it is difficult to tell, but there is no queAion that if such action tends to shorten the war or to enable the associated nations to win it, this country should not hesitate even to impair its resources for the purpose of accomplishing that object. As the ver may be prolonged it may be necessary in conjunctuon with the other nations associated with us to endeavor to prevent the arbitrage of exchenge as far as possible. In that connecticn we have read with great interest the report of the informal committee made to the secretary of the Treasury on Septembdr 13, 2917, and heartily approve of their suggestion°. The Council views with great satisfaction the increase of the gold resources of the Federal kleserve system and hopes that no steps will be omitted to increase and hasten the mobilization of the gold of the country in the Federal Reserve Banks. Grent discretion however, must be used in the methods applied so as not to create alarm which may lend to the hoarding of gold and its consequent demobilization. ':(3 note with satisfaction that the President by proclamation has placed with your Board the control of gold exports. This will insure the handling of such transactions with the discretion so necessary to avoid public alarm. TOPIC NC. 3. Loss on Gold Abrasion (Suggested by covernor Harding) Recomendation: Inasmuch as it is of paramount importance that the gold now in circulation should be mobilized in the Federal Reserve Banks which to some extent is prevented because of the existeyce of light weight gold in circulation we think the Feder-1 Reserve Eankn would be justified in assuming the loss by abrasion on such of this gold as is offered to them on deposit within reasonable, specified time. 1 Additional Recommendation: Merese, under section Four of R. R. 5901 (In the Senate of the United States, Calendar No. 121, September 13, 1917, Fages 7 and 8) the following language occurs: • "In any case of the issue of a series of convertible bonds, if a subsequent series of bonds (not including United States certificates of indeb(tedneso, war savings certificates, and other obligations maturing not more than five years from the issue of such obligations, respectively) bearing interest at a higher rate shall, under the authcrity of this or any other Act, be issued by the United States before the termination of the war between the United States and the Imperial Cernan Government, then the holders of such convertible bonds shall have the privilege, at the option of the several holders, at any time within such period, after the public offering of bonds of such subsequent series, and under such rules and regulations as the Secretary of the Treasury shall have prescribed, of converting their bonds, at par, into bonds bearing such higher rate of interest at such price not less than par as the Secretary of the Treasury shall have prescribed," Resolved that this Couchl is of the opinion that prior to the issue of these bonds it is essential that the Secretary of the Treasury should state definitely all the terms connected with them, including the price, at which any future issues bearing a higher rate of interest will be exchanged for them. Additional Recorlendatien: In f'ur opinion it may be necessary for the-succesful administration of the Food Administration Grain Corporation that the limit placed on loans by the by National b-nks by Section 5200 U.S.R.S. should not apply to loans to this Corportion. This Corporation being own2d by the United States Government loans to it may properly be classified as loans to the United Stites Government and therefore not subject to the limitation of the Inv,. 1.7e would reconlend that an early rullng to this effect should be made and promulgated by the proper. authorities. If this is not possible under existing law we recommend that the law should be amended. General discussion ensued in which various ones took part. Fleishhacker called attention to the f.-.ct that one of the large mvings bnnks in District No. 12 had lost 0,000,000 of its deposits through subscripticns to the last Liberty Loan, and suggested this as a subject which might veil have the consideration of the Board, perhaps with a view to the recommendation of an amendment to the Federal Reserve Act permitting loans by Federal Reserve banks to savings on approved securities. Governor Harding directed attention to the fct that such an amendment had been recommended by the Board in 1916 but failed of approval by Congress and also referred to a conierence which he had recently had with the State Superintendents of Banking for Maine and Now Hampshire and the conditions in those Stator° Mr. Ydlliamo suprested an amendment which would permit .9-cv- inFs banks to cone into the Systen and obtain issues of Federal Weft' notes against certain classes of their securities actually owned tlild oiferild' in the hadds of offering banks oix months prior to the drite of r. 14ing expressed himself as opposed to having savings ball° brought into the Reserve system on the ground that this would be a opini° source of weakness rather than of strength, and expresse6 the ' that there was no particular danger in connection with the ceutLmp loan but th-t there probably would be difficulty should other larcc loans follow it. help. The savings banks, he said, must ultimately have There was further discussion of the matter, in connection with which Lir, Rue raise the question as to th.; method through which a mutual savings bank could subscribe to stock, and air. i4itche1l favored steps tc enable Federal reserve banks to loan to savings banks through member banks. The situation of ;;Ltglish savings bnks as the result of 1w4ns floateu by England was dis— cus,qed by Ur. Forgan, -41c said that in the central west he bolioved the silvirgs bank operations were so combined with commercial bunking that there woulL, be a sufficient amount of comn.ercial paper for redis-cunt to care for the situation at present. He said that in Chicago, with one or t-!o exceptions, all of the savings banks had sufficient cormLer ial paper for rediscount. The liee York situation was covered by r. Vorgan, who said that the savings bnks did not represent so large a share of the financial structure that the commercial ,nks could not readily take care of them in connection He thought this also true of Ne%. England, and in reply to an inquiry from Lr. Warburg, :11() raised question as to the willingness of commercial b-Anks to e,re for the needs of savings bunks, Lr. Lorgan said it soulu be necessary for them to do it, and that this was conceded pretty generally. C` e In summing up the diacusaion, Ccverror Hurding exr,resseu the cpinien that Lho Federel reserve system shodL‘ not be weakenee in any way, that savings banks should have aid, and that ultimately the best source from t;ihinh to obtain this aia iikAB through the Govern- ment itself. Each member of the Auvieory Council was asked tc state ccnuitiche in his district for tee ir_ferzatien of the Board, with special reference to (1) the relations of clearing operations Lo Fa end reserve banks, (2) businees conditions, and (3) prospects for the sale of the new ieuue of Liberty Benue: r. Wing, Boeten. Boeton's banks are using the Federal reserve c1earir4; system with sstisfacticn, and the tendency is for bars to come into the System. There should be i2.reat care exercised in admitting smaller trust lompeenies, as it is quite possible that they may be an element of weekness rather than of strength. The First Naticnal Bank, of which Mr. Wing is President, fines it neceseary to carry a reeerve with th. ieueral Reserve Bunk of approximately t1C,000,C00 but finus that it is carrying in addition a float of (;15,C00,000 to nC,CCO,CCO representinr collections due from ether brinks, to riu itself of which it has fcund no auequate plan. Large eavings banke are aecumulatinr money, and there will probably be no trouble among them by re. en of the next flotation of Government bonds for they can ;et help from comiLercial bunks. In his opinion New England euld take only aboutore- half the total ef its last subscription to Liberty Bonds. ,his estimate Ur. Wing based upon the fellowing: 1. Many corporations already hold substantial purchases of bonds. The corporation tax. 3. The difficulty among corporations doing busi- noes vdth the. Government in obtaining prompt payment, toget or with the need for all of their capital in the business in which they are engaged. General business, . Wing saia, was falling off, but Government work is holding up tha situation. Thure is a considerable scarcity of labor. organ, New York. The Federal Reserve Bank. is groing stronger every minute. It ha u the cooperation of member banks and others who want to enter the system. The recent opinion of the Attorney General as 'Lc the application of the Clayton Act to State bank directors was helpful. The savings bank situation in New York is not so large a part cf conditions as to mnke it vital during the next loan. Business is diminishing, people being 1 if friLhtened by propcsed and possible legielation. is a teneency not to lenu money. going to be difficult. There The sule of bores is Lary small holders have not yet paiu for their previous purchases. The real difficulty is the uncertainty us tc taxes to be impcsed. Fr. L:crgan said New York, if it hau to do so, woul4robably take up 407 of the v.hole issue of bonds, say .1,500,C00,000, but to ac this it Acule have to araw upon other parts cf the country. vr. Williams interjected the statement that ret'onul bunks now held less than 1100,000,000 of the last iscue of Liberty Bonus, aria in rely to a question 14r. Lcrgan stated that he thought the interest rate on the new bonds should be 5% unu that they should be fully taxable. jr. Watts, of St, Louis, sugrested thet this 7.U3 really the perecnal preference of the Secretary of the Treasury, but he Wa3 bound to reccgnize the exemption granted to state ;Ina municipal bones. Continuing, ar. 1:organ saiu that Government loans wculd have to ceme to a. 5% basis, and that there was practically not a railroau in the country which was in condition lc take any of the new issue of bonus because is of the fact that nctes were comine :.uo and that monov bein{ taken away from them. !tr. iud, Phila olphia, re[orteu that barks ir delphiu were practically all ueinT, the Federal Reserve Bank in one way or another in connection with their -learing operatiens. member bzunks. Some non-member banks operated through In reply to an inquiry frol, 1.1r. Warburg, Mr. hue st-Ated that in Philauelphia bunks were, however, still settling clearing house bLaances in gold. The Stz.ff of the Federal hauerve Bank is totally inadequate to hundle all the collections, and canno:, absorb ill the float. Businesa is letting up, except where manufacturers are doing Government work. borrowers. These corporations are heavy It will be difficult to arouse enthusiamm for the nevi issue of bonds. vert the fir3t Issue at the new rate and with the same con- d privileges. ditio People thought they could con- PailrouQs h:..ve a serious problem before them anu ar -.) net in a condition to subscribe. companies are w-11 loaned up. Trust Lr. Rue would not prognos- ticate ho,:; much of the new issue of bonds the Philauelphia district would take. Calleu upon cut of order, Lr. Watts, St Louia, ed that now only five clearing house banks in St wjre not members of the Fe oral Reserve System. Louis Not very long ago a majority of all the local b.Inks viers TAOt unu in t.Jelve months he thought ull th.3 rest woulu join. This membership covers 807 of the banks holuing savings aepoaits, aria in each case, the eommercial cperationa of the banks hqving eaving3 deposits predominate., The St. Lcuis dietrict will come fairly v1l up in its previous allot:lent on the next Liberty Loan. The farmers were nct reached in the lust cemp ign but viculd be tieis time. Lore :ens will be sola to the exeerate investor. Nr. Mitchell, 1.einneapolis, also e lieu upon cut cf order, reported that clearing hcuse banks in the Twin Cieiee were prectically all members of the syetee.. ness conuitions are normal. Crops are good. Busi- In Minnesota the wheat crop :;ill be seventy millioe bushels, in North Dakota. 65,000,LUO bushels, but in ilontanu it will not be sc good. He believee the farmers would sell their wheat at the price fixed by the Government and that the vclume of bona ealea in the Northeest would be less than at the previous offering unleau bunks subscribe heavily for their own ac:-.ount . The savings bunk situation is not a large factor in -Lilo Nortiveest. State banks heve not felt the necessity for joining the system to any great extent thus far. r. Rowe, cf Cincinnati, said the use of acceptances In that ;Astvict was gro%ing, aspecielly in the vicinity CI Fieteburgh. Depcsitors in the savings banks hake ac- counts averaging .s 200 to OCO each, and he did not think they would be lar ely withdrawn on account of their moderate size and the interest rate of 4 to 4%. There is an active demend for money, and he thcught issues of Treasury certificates 'Lore being purchased by corporations in anticipation of heavy taxes to be levied upon the corporations and for the payment of these taxes. Mr. Norwood, Richmone, siu the banks in the smaller places in that district were uein t- the Feueral l'eserve Eank more an more, but that ha tion in Richmond. was not familiar with the situa- Business is active, crops good, and bonds will be sold to about the same extent a3 before. Mr. Lyerly, Chattanooga, Baia the Federal reserve system waa growing in favor and strength and that the savings bank situation in the Atlanta district could be careu for. There is an abundance of money, and it has been necessary to guard against expension. Seventy-five per cent of the farmers have bettor crops thAn ever before. There are 125,W, in three cantonments in the district, bringing an expendi:ure of fro:e t6,000,C00 to 03,000,000 per month. T f one-third the amount (f ecnLs sold in the last campaign were taken by the 1.tieta district in the nest campaign he thought it woulu have eore well. Their sale will be reteruee by the changed conditions as to taxaticn. flr. Forn, Chi-, -0, saie that ell th ,;ere to clearing .eouse settlinF their entire balences by crafts erawn cn the Feaeral Reserve Bunk, and all are delli_hted with the resules. There are Luray siril Stete bras which wculd like to come in, but which hold that they cunrot effora to do sc bece.use they wculu be requ:red, as central reserve city bunks, to carry l3 reserves. The b.enks in his district have fe'i. of the bones left, and are, therefore, reedy for the next eumeeeign. Business is very active, the casind for money neevy, ane bunks are leteing large amounts. Li. Switney, Ku.neue City, reportee that; e strike, now settled, had made havoc with business in Kanse,s City. The Kars corn crop was vary lur6e. The dietrict woula ac the very best it could in contecticn with the new issue of Liberty Bonc s. it was h e - gTered at the time of the last issue by the fact that its bankn were able money. orrovirg consider- There will be no eifficelty by reason of the savings bank situation in the 1Cth aistrict. Co4eiticns . tire generally rood. Swinney celled attenticn tc the teed for,subsialary silver coin and email bills. Yr. Reccre, Dallaa, steted that crops were pretty gooa e,na that thut eietriet would probably absorb as many bends as before. r. Fleishhacker, San Frurcio, said that the clearing house bank situation Was working out ir SaY, Frsncisco and that the establishment of brrrhes cf th haa been helpful. t.'Ank Businass conditions are quite satis- factory, but th-$ situatio,, of the virgs bunks in conn,, tion with ';Jith6ra..als for pur huse of liberty bonds is not good. Labor is short, -Ana there is much labor trouble. This district is much interested in the licensing of Eola for shipment abroad, and vx•-. Fleishhacker expressed the hope that the situation .ilould be h-Andled with care. sale of the second issue of Liberty Eod tirne viil take were (1 be mere difricult than tho wale of the first issue because of the chane,ed conditions. At 1:15, the meeting adjourn APPROVED: The Chairman. Secretary.